FINRA has filed a complaint against Roman Sledziejowski, President and owner of Brooklyn, NY-based brokerage firm TWS Financial, LLC, charging him with defrauding three customers of more than $4 million through a scheme, carried on primarily outside the securities firm, involving converting client funds to his personal use while providing falsified account statements to his customers. Sledziejowski, a Polish-born investment manager, and his firm TWS Financial, catered to the Polish investment community in Brooklyn, and all of his victims were natives of Poland. On November 9, 2012, TWS Financial filed an application to withdraw its broker-dealer registration.

In its complaint, FINRA alleges that between June 2009 and August 2012, as part of his scheme, Sledziejowski instructed the customers to wire funds from their bank accounts or brokerage accounts to Innovest Holdings LLC, a company wholly owned and controlled by Sledziejowski, separate from the broker-dealer, which, in turn, owned TWS, for various purported investment purposes, including acquiring a Polish bank and buying stock in a vodka company. In other instances, Sledziejowski wired funds directly from the customers' TWS brokerage accounts to Innovest Holdings without their knowledge or consent. In order to mask his misconduct, Sledziejowski provided customers with falsified account statements or "account snapshots," which were fictional accounts of their holdings in their TWS brokerage accounts or the values of those accounts. Additionally, when some of his customers raised questions about the value of their brokerage accounts or sought to withdraw funds from their accounts, Sledziejowski wired funds from Innovest's bank accounts back to their bank or brokerage accounts. To date, more than $3 million of the customers' funds remain unaccounted for. Sledziejowski also refused to comply with FINRA's request to appear for testimony to answer questions related to the misconduct in question.

The CFTC and Cantor Fitzgerald & Co. settled charges for failing to maintain sufficient funds in its customer segregation account for a period of three days, for failing to provide the CFTC timely notice of its under-segregation, as required, and for related supervisory failures. The CFTC order imposes a $700,000 civil monetary penalty and a cease and desist order on Cantor, and requires Cantor to undertake certain improvements to its internal controls to prevent future under-segregation violations and notification failures.

Cantor, as a registered FCM, is required to segregate customer funds from its own funds and on a daily basis compute the amount of customer funds required to be segregated. The CFTC order finds that, on three consecutive days, January 24 to January 26, 2012 (the “relevant period”), Cantor failed to maintain adequate segregated customer funds due to an inadvertent transfer of $3 million from its customer segregated funds account, instead of from Cantor’s house account, as intended. According to the order, on each of the three days, Cantor made the daily required computation to determine the amount of customer funds it needed to be on deposit to meet its segregation requirements. However, Cantor failed to realize it was under-segregated until January 27, 2012, when the Cantor operations department employee primarily responsible for determining Cantor’s daily segregation requirements returned to work after being out unexpectedly. The Cantor operations department immediately corrected the segregation deficiency and the firm came back into compliance with its segregation requirements by transferring the $3 million back into the customer segregated funds account.

The order also finds that Cantor had related supervisory failures by not having an adequate system of internal controls and procedures to ensure that daily segregation calculations were reviewed and deficiencies noted, appropriately escalated, and addressed. Cantor also lacked sufficient procedures and training concerning the regulatory requirements relating to segregation of customer funds and failed to have adequate procedures and controls relating to the transfer of funds to and from customer segregated funds accounts.

The New York AG filed a Martin Act complaint against Credit Suisse Securities (USA) LLC and its affiliates for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage­-backed securities (RMBS) to investors.

According to the complaint, Credit Suisse deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to 2008. RMBS sponsored and underwritten by Credit Suisse in 2006 and 2007 have suffered losses of approximately $11.2 billion. Credit Suisse led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored. In fact, it failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans. The loans in Credit Suisse’s mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers.

This complaint is the most recent enforcement action by the Residential Mortgage-Backed Securities Working Group, a state-federal task force created by President Obama earlier this year to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities.

A Bank of New York Mellon unit, Ivy Asset Management, will pay $210 million to settle claims that it concealed its doubts about Bernard Madoff's business operations. This resolves litigation brought by the New York AG, the U.S. Dept of Labor and investors. Ivy was a "feeder fund" that directed clients' funds to Madoff. According to the New York AG's press release:

Internal Ivy documents reveal the firm’s deep but undisclosed reservations about Madoff. One email from an Ivy principal to his subordinate stated: "Ah, Madoff, you omitted one possibility - he’s a fraud!"

Despite its reservations, Ivy did not disclose its suspicions to clients for fear of losing the fees Ivy received through the Madoff investments. Instead, it falsely told them that "we have no reason to believe there is anything improper in the Madoff operation," and that Ivy's only concern about Madoff was the difficulty of managing the enormous pool of assets he had under management.

The Financial Stability Oversight Council issued proposed recommendations calling for additional regulation of money market mutual funds for public comment. The Council issued three alternatives for consideration:

•Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and / or penny rounding to maintain a stable NAV. The value of MMFs’ shares would not be fixed at $1.00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.

•Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.” Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (MBR) — be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor’s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.

•Alternative Three: Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and wouldreduce the size of the NAV buffer required under this alternative accordingly.

The Council’s proposed recommendations are not mutually exclusive and could be implemented in combination to address the structural vulnerabilities that result in the susceptibility of MMFs to runs. The Council also is seeking public comment on other potential reforms of MMFs that meet the objectives of addressing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs.

FINRA announced that it "significantly increased transparency" in the "To-Be-Announced" (TBA) market for agency pass-through mortgage-backed securities. This market represents more than $270 billion traded on an average daily basis in 8,400 trades. Through the Trade Reporting and Compliance Engine (TRACE), FINRA has begun disseminating TBA transaction information, including the CUSIP, time of transaction, price, size and other related information.

In addition to the TBA market, the SEC approved a FINRA proposal to publicly disseminate transaction information in agency pass-through mortgage-backed securities traded "specified." This market represents approximately $19 billion traded on an average daily basis in 3,000 trades. FINRA will announce the effective date of this proposal in a forthcoming Regulatory Notice. Together, the market for agency pass-through mortgage-backed securities traded TBA and specified represent more than 93 percent of par value traded in all asset- and mortgage-backed securities.

TRACE was established in July 2002 to create a regulatory database and bring transparency to the corporate bond market.

FINRA has expelled NY-based Hudson Valley Capital Management and barred Chief Executive Officer, Mark Gillis, from the securities industry for defrauding its clearing firm and customers by using their funds and securities to cover losses caused by Gillis' manipulative day trading.

FINRA found that in 2012, Hudson Valley, acting through Gillis, used the firm's Average Price Account to improperly day trade millions of dollars of stock. Gillis then manipulated the share prices of these stocks and withdrew the proceeds of his day trading through accounts he controlled. When Gillis' fraudulent trading caused significant losses in the firm's account, he covered those losses by making unauthorized trades involving customer accounts. Gillis purchased thousands of shares of securities in the open market in the firm's account and allocated these shares to customers at markups between 177 percent and 280 percent. Gillis also converted a customer's funds to pay for an unauthorized stock purchase and caused another customer to sustain a loss of approximately $400,000. When confronted about unauthorized trades that occurred in their accounts, Gillis lied to two customers about the transactions to hide his misconduct, and lied to FINRA staff during sworn testimony.

The U.S. Chamber of Commerce, in a letter to Treasury Secretary Timothy Geithner, expressed its concern about Treasury's request that the Financial Stability Oversight Council (FSOC) use its authority, under Dodd-Frank 120, to recommend changes to the SEC's regulation of money market funds. Such action would, it warns, "create uncertainty, weaken financial regulation, harm investors, and damage the capital formation process needed for businesses to grow and create jobs."

The Chamber faults the SEC for "failing to do any of the necessary work to study the impact of prior money market mutual fund reforms and identify any additional needed changes." The Chamber requests that Treasury withdraw its request and instead encourage the SEC to consider a different approach. The Chamber understands that the SEC is moving forward with a study of the impact of the 2010 reforms. Only after completion of that study and any proposed course of action by the SEC should the Council consider using its authority under Dodd-Frank 120.

The investor files a special written submission agreement to submit the dispute to FINRA Dispute Resolution that is:Signed by all parties to the arbitration (including all investor parties and all IA parties).Signed after the events occurred that gave rise to the underlying dispute.

The special submission agreement requires the parties to acknowledge that:

FINRA cannot enforce awards entered against non-member IAs and/or their employees (because FINRA is not a Self-Regulatory Organization for IAs).

Prevailing parties may enforce awards entered against non-member IAs and/or their employees in a court of competent jurisdiction pursuant to applicable state or federal law.

FINRA may bar the IA from the forum in future cases if an IA fails to pay any award, settlement agreement, or FINRA fees.

FINRA and its arbitrators and mediators will be held harmless from liability arising in connection with the resolution of the parties’ dispute.

Disputes involving IAs will be administered in accordance with the SEC approved FINRA Codes of Arbitration Procedure.

The final award will be made publicly available.

FINRA will also accept industry disputes between non-member IAs and their employees on a voluntary, case-by-case basis if the parties meet the above conditions. FINRA will offer mediation services for any IA disputes on a voluntary basis.

FINRA filed a Temporary Cease-and-Desist Order (TCDO) today to halt further fraudulent sales activities by Michigan-based WR Rice Financial Services and its owner Joel I. Wilson, as well as the conversion of investors' funds or assets. FINRA also issued a complaint against WR Rice and Wilson charging fraud in the sales of limited partnership interests in entities affiliated with the Diversified Group and American Realty Funds Corporation, companies in which Wilson has ownership interest and control. FINRA is filing the TCDO based on the belief that ongoing customer harm and depletion of customer assets would likely continue before a formal disciplinary proceeding against WR Rice and Wilson could be completed.

In its complaint, FINRA alleges that WR Rice, Wilson and other registered representatives at the firm sold more than $4.5 million in limited partnership interests to approximately 100 investors from predominantly low-to-moderate-income households, while misrepresenting or omitting material facts. FINRA charges that Wilson and WR Rice raised funds promising that the proceeds would be invested in land contracts on residential real estate in Michigan, paying an interest rate of 9.9 percent, when in fact, investors' funds were used to make unsecured loans to companies Wilson owned or controlled. In addition, FINRA alleges that WR Rice and Wilson failed to disclose to investors that Wilson extended the improper loans due to an inability to pay them as they became due.

Massachusetts Securities Division fined Citigroup $2 million for failing to supervise tech analyst Mark Mahaney and a junior analyst who improperly disclosed confidential information about Facebook's IPO and Google's revenue estimates. Citigroup fired Mahaney, who is a top-ranked internet analyst. Citigroup admitted to the statement of facts and agreed to cease and desist from violating state securities laws.

NASAA released its annual enforcement report, compiling statistics on enforcement actions by state securities regulators for 2011. The survey reports a significant increase in enforcement actions against investment adviser firms last year: they nearly doubled to 399 in 2011 and accounted for 15 percent of all enforcement actions handled by state securities regulators.

The majority of the investment fraud cases reported by state securities regulators featured unregistered individuals selling unregistered securities. More than 800 reported actions involved unregistered securities, and more than 800 actions involved unregistered firms or individuals. For the second consecutive year, Regulation D Rule 506 private offerings and real estate investment schemes were the most reported products at the heart of state securities enforcement actions.(Download 2012-Enforcement-Report-on-2011-Data[1])

FINRA has ordered David Lerner Associates, Inc. (DLA) to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT) DLA sold, and to customers who were charged excessive markups. As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors. To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners.

FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations.

In addition, FINRA fined David Lerner, DLA's founder, President and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers. To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a "fabulous cash cow" or a "gold mine," and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a "windfall" to investors.

FINRA also sanctioned DLA's Head Trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.

FINRA also required DLA to retain independent consultants to review and propose changes to its supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and municipal bonds. In addition, DLA agreed to revise its advertising procedures, including videotaping sales seminars attended by 50 or more people for three years, and is required for one year to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use.

FINRA has expelled EKN Financial Services, Inc. of Melville, NY, for numerous compliance violations and for allowing its CEO, Anthony Ottimo, to act as a supervisor after being barred from acting in that capacity by the SEC in June 2008. FINRA barred Ottimo from the securities industry and barred the firm's former President, Thomas Giugliano, from acting in a principal capacity, suspended him from the securities industry for one year and fined him $150,000. EKN, through Ottimo and Giugliano, also violated numerous NASD/FINRA and SEC rules and federal securities laws, including anti-money laundering (AML) violations, net capital deficiencies and widespread reporting failures.

FINRA found that from 2008 through 2011, Ottimo acted in a supervisory role despite an SEC order that barred him from associating with any broker or dealer in a supervisory capacity, and acted as CEO despite not being registered as a principal. During the relevant period, EKN and Giugliano repeatedly misrepresented to FINRA that Ottimo was no longer acting as EKN's CEO, as a principal or as a supervisor. In 2011, EKN lied to FINRA examiners, reporting that since 2008, it had "never filled" the CEO position when, in fact, FINRA's investigation revealed that EKN's own documents indicated that from 2008 through 2011, Ottimo was listed as EKN's CEO and was operating in that capacity. As CEO, Ottimo supervised other EKN personnel, negotiated and executed agreements, controlled its finances, retained signatory authority over its bank accounts, and represented himself as EKN's CEO to its clearing firm and other third parties.

In addition, FINRA found that EKN, Ottimo and Giugliano, who was aware of EKN and Ottimo's regulatory violations, committed numerous AML violations, including failing to establish an adequate AML compliance program to detect and report suspicious activity, and failed to meet minimum net capital requirements during certain periods from September 2008 to November 2010

On October 11, 2012, the SEC posted on its website a Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change to Amend NASD Rule 2711 and Incorporated NYSE Rule 472 to Conform with the Requirements of the Jumpstart Our Business Startups Act and Related Changes (Download 34-68037[1]). Comments are due 21 days after publication in the Federal Register.

FINRA seeks comment on a revised proposal addressing debt research conflicts of interest that includes amended exemptions for research distributed to certain institutional investors and for firms with limited principal debt trading activity. The revised proposal also includes other changes in response to comments on the prior proposal set forth in Regulatory Notice 12-09.

FINRA fined Guggenheim Securities, LLC of New York $800,000 for failing to supervise two collateralized debt obligation (CDO) traders who engaged in activities to hide a trading loss. FINRA sanctioned the two traders: Alexander Rekeda, the former head of Guggenheim's CDO Desk, was suspended for one year and fined $50,000; Timothy Day, a trader on Guggenheim's CDO Desk, was suspended for four months and fined $20,000.

In October 2008, as the result of a failed trade, Guggenheim's CDO Desk acquired a €5,000,000 junk-rated tranche of a collateralized loan obligation (CLO). After unsuccessful attempts by Guggenheim's CDO Desk to sell the position, Rekeda and Day persuaded a hedge fund customer to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely presenting the CLO as part of a package of securities a third party offered for sale. FINRA found that in an attempt to hide the trading loss on the CLO position, the traders provided the customer with order tickets that increased the price for the CLO position and decreased the price of the other positions that were part of the transaction. When the customer inquired about the pricing adjustments, Day, at Rekeda's direction, lied and said a third-party seller of the CLO position had already settled the trade at a higher price and requested the customer pay this higher price. The customer agreed to overpay for the CLO and in return, Day and Rekeda agreed to compensate the customer through other transactions, including pricing adjustments on six other CLO trades, a waiver of fees the customer owed in connection with resecuritization transactions, and a cash payment to the customer. The records created to document the transactions did not indicate any connection to the overpayment for the CLO.

FINRA found Guggenheim failed to conduct adequate review of the CDO Desk's trades, documentation concerning transactions by traders on the desk, and the traders' email communications. As part of the settlement, Guggenheim must retain an independent consultant to review and make recommendations concerning the adequacy of its supervisory procedures.

Yesterday the president of NASAA, Arkansas Securities Commissioner Heath Abshure, joined three investor advocates in sharply criticizing the SEC's proposed JOBS Act rulemaking that implements the elimination of the prohibition against general solicitation in Rule 506 and Rule 144A offerings.(Download 33-9354[1])

Abshure, along with representatives from AARP, the AFL-CIO, and the Consumer Federation Of America, called on the SEC to withdraw its proposal and craft a new rule that promotes capital formation without sacrificing investor protection. (The comment period on the rule expired last week.)

“People don’t seem to think so, but this is a drastic change to the face of securities regulation,” Abshure said. “Rule 506 offerings already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse. Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

Yesterday the New York State Attorney General brought a civil suit against Bear, Stearns & Co. (now J.P. Morgan Securities LLC) under the state's Martin Act arising out of Bear's role in connection with the creation and sale of residential mortgage-backed securities ("RMBS" to investors prior to the firm's 2008 collapse. AG Eric Schneiderman is co-chair of the Residential Mortgage-Backed Securities Group formed by the DOJ in January 2012. According to the complaint:

At the heart of Defendants' fraud was their failure to abide by their representations that they took a variety of steps to ensure the quality of the loans underlying their RMBS, including checking to confirm that those loans were originated in accordance with the applicable underwriting guidelines, i.e., the standards in place to ensure, among other things, that loans were extended to borrowers who demonstrated the willingness and ability to repay.

As a result, the complaint alleges, defendants' misconduct constituted "a systemic fraud on thousands of investors." The complaint does not set forth with specificity the requested relief beyond an injunction, an accounting, disgorgement, restitution and damages.

The AG's allegations are similar to those made in a number of private lawsuits currently before the courts.

From 2007 to 2011, Merrill Lynch failed to file or timely file more than 650 required reports, including customer complaints and customer settlements.

From 2005 to 2011, Merrill Lynch failed to report or timely report customer complaints, and related Forms U4 and Forms U5 between 23 percent and 63 percent of the time.

Merrill Lynch failed to adequately train and supervise personnel responsible for customer complaint tracking and reporting, and did not have systems in place to identify the high volume of customer complaints that were not being acknowledged or reported as required. As a result, Merrill Lynch failed to acknowledge nearly 300 customer complaints in a timely manner.

Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received for approximately three years.

From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100 percent of the time.

From 2007 through 2010, Merrill Lynch failed to file related Forms U4 and U5 between 28 percent and 79 percent of the time.